After reviewing the FOMC statement from the September 2017 meeting, the one word description I believe is best suited is: confused. Though, the words “contradictory” and “deranged” were also in the running for the top spot because when broken down to the most simplistic terms without losing meaning, the statement plays lip service to the inflation target, calling it “symmetrical” while acknowledging the current inflation predicament of a widening gap between current yoy measures and the official target but, in the end, calling for the selling of portfolio assets, aka shrinking the base with OMO’s.
To break this down into even simpler terms, the equation of exchange, MV=PY, is useful as a discussion tool because whatever is done to the left side of the equation ends up being done to the right assuming all else is equal. If we change this to the MM preferred version, MV=NGDP, unless V is rising enough to offset the portfolio sales in addition to all of the other Fed programs that encourage hoarding, NGDP will take a hit that will be split in some random combination between inflation and growth. Given that there is almost no sign that V is on a wild growth tear, there is nearly zero chance of the inflation target being approached, let alone hit, and the selloff option appears to be an odd game of monetary Russian Rolette with 5 bullets in the chamber instead of one. Either inflation or growth suffer with almost no upside.
If the inflation target is symmetrical as claimed, and PCE core has not approached 2% for several years, the question of when the Fed will comply with its interpretation of its legislated mandates is still as open and unaddressed as ever because in order to average 2% inflation over the medium term, PCE inflation must spend as much time above target as it does below. But all we get is below with the actions voted for in the latest meeting sending more likely than not to send it in the wrong direction. The only reliable longer term outcome is that the balance sheet will inevitably end up larger with almost nothing to show for it but chaos and heartbreak mixed in for the rest of us.
As far as my recommendations go, it’s been said that the time for above target inflation should be saved for a downturn, and that while the economy is growing, that is not the time for stoking it. But I look at this as a false choice between pedal to the metal policy or what the Fed is currently doing given the state of the target history. Because the current balance sheet and inflation predicament is the result of dramatically conservative ceiling policy, there is room for middle-ground policy moderation in expectations management (perhaps instead of selling assets, some potion of them will be “forgiven”) that would generate a mild degree of above target inflation, enough to allow more assets to be sold off in mild quantities over time and bring the Fed a little closer to the 2% medium term average while still keeping the powder dry, as it were. Wanting the Fed to be more thoughtful of its impact on society and maintain some semblance of defensibly legal is not in any way radical or irresponsible.
The apparent alternative is, with the current policy choices, if the target is truly symmetrical as claimed, the true nature of black and white choices will become readily apparent – if it is even possible to generate that much inflation to bring the average up to 2% in a downturn. We need to stop making the choice that too low for too long must equal too high too fast in any sense, or we are doomed in more ways than one because choosing between black and white does not make for a healthy economy and neither is politically palatable.